PPP Loans Create Divergent Disclosure Paths for Brokers and Advisers

Payroll Protection Program (PPP) Loans

Recent guidelines issued by the Securities and Exchange Commission (SEC) have again shed light on the fact that broker-dealers and investment advisers address disclosure issues differently. Specifically, the Payroll Protection Program (PPP), which was established pursuant to Section 1106(b) of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), has resulted in two substantially different disclosure criteria for broker-dealers and investment advisers.

By way of background, PPP allows eligible individuals and small businesses to obtain loans that can be used during the COVID-19 crisis. A PPP loan is eligible for forgiveness, provided the terms of the loan forgiveness are satisfied by the borrower.


For broker-dealers who are member firms of the Financial Industry Regulatory Authority (FINRA) , the issue surrounding disclosure stems from the forgivable nature of the loan, that being … is it a “compromise with a creditor”? FINRA has stated that because a PPP loan contemplates forgiveness of some or all of the loan, as part of the original terms of the loan, such forgiveness is an event consistent with the loan’s original terms. In those circumstances, the forgiveness of a PPP loan is not a compromise with creditors for purposes of Form U4 Question 14K, and as such, FINRA broker-dealers are not required to disclose PPP loans on their U4 Forms (provided they are used according to the original terms of the loan), or on any other public disclosure form.

Investment Advisers

For investment advisers, the disclosure issue is centered not on forgivability, but on the question of whether the event has the potential to, or does in fact have a financial impact on the adviser that materially impacts the advisers’ ability to fulfill its advisory obligations to its client. Per the FAQ released last week by the SEC, the SEC has stated that to the extent PPP loans are used for the intended purposes of covering payroll expenses, specifically those persons performing primarily advisory functions, the loan would be considered a material fact relating to the advisers ability to perform its advisory services. As such, the SEC believes that advisers must disclose their PPP loans on Item 18 of the ADV Part 2A and the Appendix I, as the loan would constitute a “material fact” pertinent to the advisory relationship.

Notwithstanding that, advisers may be able to avoid such disclosure in some limited situations. To this end, one approach would be for the advisory firm to claim that the funds were obtained primarily due to the economic uncertainty posed by COVID-19 (which is consistent with the SBA representations made by the borrower in the loan application process), but not necessarily because the loan funds were “required” at that moment. As such, the PPP loan arguably would not be a material fact requiring disclosure.  However, while this argument supports the advisers position with the SEC to not disclose the PPP loan on the Form ADV, the adviser runs the risk that the argument is used to undermine the certification made by the adviser to the SBA as a basis for the loan, that being that “Current economic uncertainty makes this loan request necessary to support the ongoing operations of Applicant”. As a result, this approach may create more issues than it is meant to cure.

Another path to non-disclosure that an adviser might contemplate is that the loan proceeds are only used for the payroll of employees who were not directly involved in advisory functions (e.g., staff involved in administrative, marketing, and receptionist duties), and as such, is not directly tied to the advisory services provided to the advisers clients. This approach clearly moves the adviser away from the scope of the SEC’s disclosure requirement. However, it should be noted that this approach makes the computation difficult with regards to any of the “forgiveness” aspects of the loan, and therefore, the portions of the PPP loan not forgiven, would be repaid pursuant to the terms of the loan.

Paths to Disclosure

It is apparent that a PPP loan will have minimal disclosure impact on broker-dealers, as no disclosure will be required if the terms of the PPP loan are followed. The same cannot be said for investment advisers. Ultimately, advisers should seriously consider making disclosures on their ADV Part 2A and on the Appendix I, if applicable, should they obtain a PPP loan. It appears that it would be better to defend a disclosure to the SEC, than argue with the Small Business Administration regarding whether the loan was not necessary for the ongoing operations of the adviser, especially where the SBA could base its argument in part on the advisers own lack of disclosure per SEC guidelines. A final thought on this matter is that the extent the SEC requires additional disclosure at a later date, it will be after the fact (i.e., once the loan is forgiven or being paid pursuant to its terms), and the initial disclosure will have been in all likelihood, removed from the Form ADV, as it will no longer be material.

However, with the above in mind, the final, and potentially most painful aspect for advisers is not really the disclosure on the Form ADV. That pain remains to be that the updated Form ADV (or a summary of the disclosures), will have to be offered to all clients, again, because the disclosure is regarding financial condition, and as such, it is deemed to be material. This comes almost immediately after most advisers have just completed the annual update and offering/delivery process for their Form ADV.

For advisers, each choice has ramifications, and the implications of their decision should be carefully considered.  As to broker-dealers, they get a walk on PPP loan disclosures, assuming they comply with the terms and conditions of a PPP loan.